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On Friday, February 17, the Senate and the House agreed to an extension of the employee payroll tax cut through the end of 2012. The legislation also blocks a scheduled cut to Medicare physician reimbursements and extends federal unemployment benefits. For an employee making $50,000 in 2012, the payroll tax cut provides approximately $1,000 in additional take-home pay by extending the expiring rate of 4.2 percent, compared with the regular 6.2 percent Social Security employee payroll tax rate. Employers continue to pay their 6.2 percent share of the overall 12.4 percent tax.

In late December, Congress passed a temporary two-month extension after a heated and contentious debate. Agreeing on legislation to extend the benefits another 10 months was the top priority for Congress upon return to Washington this year, although budget hawks are disappointed that the bill was not fully offset. Supporters of the payroll tax holiday argue that the extra spending cash in the hands of workers serves as a boost to the still struggling economy.

The legislation includes approximately $50 billion in offsets to cover the extension of unemployment benefits and the Medicare reimbursements, but does not cover the estimated $100 billion cost of extending the payroll tax cut.

Offsets were found in a number of ways, including selling electromagnetic spectrum ($15.2 billion in revenue) and raising the contribution level of new federal employees for defined retirement benefits ($15.5 billion). Offsets of more than $20 billion from health care programs include $6.9 billion in Medicare bad debt payments to hospitals, $4.1 billion through rebasing Medicaid Disproportionate Share Hospital payments in 2021, and by slowing growth of the Prevention and Public Health Fund, which was established in the Affordable Care Act.

The House agreed to the legislation, 293-132, and the Senate passed it by a vote of 60-36.


Liz Clark

Vice President, Policy and Research


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